mergers are a more profitable strategy than predation….however…. deep pocket predation might also be profitable because it would decrease the price at which the rival is bought.
How to deal with predatory pricing allegations?
incumbent firms might use aggressive pricing strategies to deter entrants and/or force competitors out of their industry: eg. they can build a reputation for being tough, so as to scare potential entrants, they might want to set low prices , or they might erode a rival’s resources so they donot get funding.
But…. a ”price below cost“ test might not catch all the possible instances of predation.
•A price above average total costs is always lawful
•A price below average total costs, but above average variable costs, is presumed lawful, with the burden of proving the opposite on the cma.ec.
•A price below average variable costs, is presumed unlawful, with the burden of proving the opposite on the defendant.
further elements that might be raised during a predatory pricing case, as a Defence: intent, proof of recoupment, proof of anti-competitive effects, and matching competitors’ prices.
1-Intent (existence of a predatory scheme) In many predation cases, there is evidence from internal documents that the alleged predator’s managers intended to exclude a new entrant, or force a competitor out. e-mail, minutes and other internal papers where one or more managers adopt a very strong language against competitors and state they want to eliminate them, ”kill“ them or the like, should not be given much importance, as they are probably to be found in any company’s headąuarters and – right or not – are part of the usual business language. (I would be much more suspicious of managers who say they want to be nice to their competitors, and would suggest immediately opening a collusion investigation!)
the burden of proving that there was no predation, should be on the alleged predator.
No need to prove recoupment or success of predation ex-post :
The proposed test suggests looking at the alleged predator map, to see if there is the ability to recoup losses in the long-run.
No need to prove ex-post damage to consumers :
the fact that the predator expects to recover losses from raising prices after exclusion points to a horizon long enough for (future) high prices, to have a higher weight than (current) low prices, means that consumer surplus will decrease.
Meeting prices of a competitor as a defence:
entry by a competitor would trigger a response by the incumbent firms, leading them to decrease their prices. Therefore, observing that a dominant firm’s price decreases following entry is per se no proof of strategic behaviour.
However, matching a rival’s price should not be accepted, if it leads the incumbent to price below average variable costs.
matching a competitor’s price should not be an accepted defence, if it implies prices below average variable costs for the incumbent. Conversely, a price above average total costs, is lawful, even if it implies undercutting a smaller competitor or a new firm.
Predatory prices in hitech markets :
hitech markets are characterised by extremely high fixed costs and very low – if not nil – marginal costs (as well as average variable costs). Think for instance of software, where R&D is the main expenditure firms incur to develop a new software package, and where the cost of producing and selling an additional unit of it, whether in the form of CDs or downloads, is next to zero.
hitechs are also characterised by very important network externalities, either direct (the more other people use my same software the happier I will be because the more likely I can exchange files with them) or indirect (the more people use my same OS the happier I will be because the more likely that software developers will write applications). This means that we should expect very intense competition in the early stages of the market, until the market tips in favour of one firm, which will then become dominant and use its market power to recover the losses incurred in the initial periods, until a new technology will appear that replaces the old one, bringing to an end the previous leadership.
Non-price monopolisation practices:
strategic investments, tying, incompatibility decisions, exclusive dealing, and refusal to supply, have already been analysed in chapter
Strategic investments
when a dominant firm reduces prices, it is very difficult to understand whether this is due to genuine, lawful competition, or to anticomps; also, since low prices are something that consumers like, one has to be extra careful not to discourage firms from decreasing prices.
thus, only in truly exceptional cases we should accuse a firm of over-investment; further, the burden of proof should be on the plaintiff, or the competition agency, not on the defendant.
for a period, a firm invests more than is profitable in the short-run, with the expectation of increasing profits in the long-run
Overall, therefore, while it is theoretically possible that an incumbent overinvests in advertising, R&D, or capacity; or that it introduces new brands, or engages in product proliferation for the purpose of strategically deterring entry or forcing exits of smaller rivals, it would be hard to prove.
in network markets, an incumbent (more generally, a firm with a large installed base) might have an incentive to lower the degree of interoperability (or compatibility, or connectivity) with new entrants or with firms with a smaller customer base. However, this is not always the case: the incumbent might actually gain from full interoperability. This is because full interoperability eliminates the incumbent’s competitive advantage due to its larger customer base, but it increases the demand of new consumers in the market. If the installed base is small relative to the new demand, the market expansion effect dominates
ways to raise rivals’ costs:
A/ Pricediscrimination
Price discrimination is a pervasive phenomenon…eg. Books are sold at di(erent prices according to whether they are hardback or paperback (but the cost of the hardback binding does not explain alone the price difference); journals charge a higher price for libraries and institutions than for private citizens (and sometimes make further discounts to students); if we buy pencils and paper in a shop for our private use we certainly pay more per item than our university or firm that buys a large amount; airlines apply very different tariffs not only for business versus economy trips, but also for the same type of seat and trip according to whether the passenger is a student, a senior citizen, has booked early or at the last minute, and so on.
price discrimination increases their profits
The two main ingredients of price discrimination:
- a firm must have a way to sort consumers, so as to charge them di(erent prices.
- arbitrage should be absent. In other words, a firm would not manage to price discriminate, if consumers could resell the goods among each other.
if cma.ec think that price discrimination should be forbidden, they will intervene in the practices used by firms to prevent arbitrage. For instance, they could reąuire a firm not to include any clause limiting the ability of dealers to re-sell the product in other territories; or they could prevent an airline clerk or a train conductor from asking passengers for their ID cards and so on.
price discrimination not always hurts ew.
any firm that has some degree of market power will have an incentive to price discriminate. Indeed, small and large firms, operating in very di(erent sectors of activity, try to price discriminate to increase their profits. In the EU, all firms are currently prevented from prohibiting parallel imports. eg. the ec banned a small manufacturer of motorcycles of large engine capacity (750cc and over), Triumph, from banning exports of motorcycles from Belgium and the Netherlands to the UK (where its products commanded a higher price).
but… does it make sense to extend the prohibition [of preventing parallel imports], to firms with little market power, as is currently the case in the EU?
price discrimination by firms having small market power should be welcome rather than prohibited, as it may allow them to become more competitive. It is therefore difficult to justify, why the EC does not introduce a threshold where firms with a market share below, will not be investigated for hampering parallel trade. The objective of such a tough stance against price discrimination is for political reasons only (giving citizens of di(erent countries access to the same deal), but ec failes to realise that this comes at a cost of ew.
can price discrimination be used to pre-empt entry, or force exit, of competitors?: not just by itself.
B/ Aggregate rebates
are discounts given to a customer that buys most or all of its products from that same producer.
ec and ecj have always taken a tough stance on discriminatory prices adopted by dominant firms and which are not justified by cost savings.
C/ Anti-dumping
Anti-dumping laws have been adopted by many countries (USA, Australia, Canada and the EU , whereas less developed countries are usually defendants) and are often enforced vigorously.
They are generally seen as an instrument of trade policy rather than of cl.
The wto, World Trade Organisation (the organisation that presides over multilateral trade agreements) recognises the right of its members to take unilateral actions to protect themselves when their domestic industry is injured by unfair trade practices, such as foreign firms ”dumping“ (i.e. selling at an exceedingly low price).
anti-dumping actions are legitimate when two conditions are verified:
- export prices are below normal value;
- exports cause or threaten material injury to the importing country.
price discrimination between different markets is compatible with the goal of profit maximisation, and neither necessarily entails the intention of forcing rivals out of the market, nor is it necessarily welfare detrimental.
In international trade, price discrimination takes naturally the form of different prices in different markets. since firms tend to have a larger market share and a more faithful demand in their domestic market, domestic price is higher at home than abroad.
anti-dumping cma.ec actions is used , politically, to protect a country from foreign competition. antidumping also creates anticomps.
Anti-dumping duties should be justified only when predatory pricing is involved. Accordingly, dumping should not be considered as belonging to the domain of trade policy, but rather to cl.
• USA v Microsoft:
In May 1998, the US Department of Justice and a group of States filed separate complaints (which were later consolidated) asserting anti-trust violations by Microsoft. The company’s alleged anti-competitive practices dealt with business practices related to its internet browser, Internet Explorer (IE), which competed with Netscape Navigator, initially the leading browser.
Microsoft was found liable of three separate cl violations:
(I) maintenance of monopolisation in the market of Intel-compatible (OS) for PC – Windows OSs belong to this category – (an infringement of section 2 of the Sherman Act);
(II) attempted monopolisation of the internet browser market (violation of section 2);
(III) tying its Windows OS with IE (in violation of section 1).
In June 2000, the District Court issued its Fsnal Judgment, imposing on Microsoft behavioural remedies and structural remedies: split Microsoft into two separate companies, one devoted to operating systems and the other to applications.
Microsoft filed an appeal, and the Court of Appeals (CA) issued its decision in June 2001. It ruled that (I) Microsoft was guilty of maintenance of monopolisation for some of the business practices it had adopted, but (II) it was not guilty of attempted monopolisation, and (III) found that the tying allegations should be analysed under a rule of reason, rather than under a per se rule
In the US, to find that a firm is guilty of monopolisation reąuires first to prove that there is monopoly power in the relevant market, and second that it has been acąuired or maintained through anti-competitive conduct….. Microsoft was found to have both.
•Causation
Microsoft asked the CA to reverse the monopolisation findings because the causal link between Microsoft’s conduct and the maintenance of Windows’ monopoly had not been established (that is, there is no evidence that Netscape and Java would have developed into viable platform substitutes). However, the CA rejects this argument for two reasons. First, because it would imply putting onto the plaintiff the burden of proving that an infant firm would grow into a strong competitor; second, because both Navigator and Java showed potential as middleware platform threats.
The District Court found that Microsoft was guilty of attempted monopolisation of the browser market. In order to establish a violation for attempted monopolisation, the CA argues that the following test must be satisfied: first, the defendant is showed to have engaged in anti-competitive conduct; second, it had a specific intent to monopolise; and third, ”a dangerous probability of achieving monopoly power“ must have existed (US v. MsGrosoft: 62).
an alleged abusive practice infringes cl, only if:
(1) it is found to harm the competitive process substantially, and
(2) if it does not have efficiency justifications, or if these efficiency justifications do not outweigh the anti-competitive effect of the practice.